Taxes, Finances and Legal Stuff with a little Entertainment

The Real Slim Shady (The Real Deal Behind Tax Protestors)

November 16, 2006

*With headlines about Wesley Snipes and Ron Isley’s tax woes, it looks like that tax man is coming after famous folks with a vengeance. But, these two entertainers have extreme circumstances and fact patterns. Their tax problems span over years (for Ron Isley, even decades) of IRS letters, phone calls and meetings. In other words it should come as no surprise.

Since the beginning of the tax laws, there have been numerous people or groups who have claimed that they don’t have to pay taxes – known as tax protestors. Their reasons range from taxes being unconstitutional (i.e., thanks to the 16th amendment) to “I’m a Martian and not subject to your tax system.”

Tax protestors can be found from all walks of life. Take the case of Richard Simkanin, a Texas businessman who failed to pay his tax bill of several thousand dollars, because of his “Christian” beliefs; basically, “Gawd” made him do it. He and his cohorts took out a full-page ad in USA Today explaining their beliefs. He even threatened the IRS that if they came after him they would be “consumed by fire.”

As unbelievable as this may sound, it’s estimated that there are thousands of tax protestors, various anti-tax arguments. The one thing they all have in common? They lost against the IRS every time. Here’s The Real Deal on several types of tax protestors (Note: for more examples of reasons given by tax protestors to avoid paying taxes check out this Web site run by Attorney Daniel B. Evans – http://evans-legal.com/dan/tpfaq.html#why).

1. The “I’m Not Paying” Tax Protestor

Protestor Profile: This type of protestor knows they aren’t paying taxes, and refuses to do so using some constitutional argument or tax law.

Celebrity Example – Wesley Snipes: In Wesley’s case, he joined up with a group called American Rights Litigators, which later became Guiding Light of God Ministries. This group allegedly promoted and sold tax schemes, and was run by CPA, Douglas Rosile and Eddie Ray Kahn.

The group argued that under an arcane tax law, known as Section 861 of the Internal Revenue Code, their clients don’t have to pay US income taxes. Section 861 and the tax regulations that explain it were meant to cover situations for non-resident aliens who have income in the US, or US citizens who have income outside the U.S. It provides a detailed set of rules for figuring out how much of that income is subject to U.S. tax.

The tax protestors argue that these rules work in such a way that only people who work for foreign companies have to pay taxes in the U.S. So, if your company is headquartered in the United States, whether it’s Fortune 500 or a small mom and pops business, you don’t have to pay taxes.

Armed with this “theory” the group filed almost $36 million in tax refund claims for its clients, including some $12 million for Snipes. They even held a seminar at Snipes home in 2000, to teach folks about this crafty tax loophole known as 861.

Of course, the story doesn’t end here. According to the federal indictment, on a few occasions Snipes spoke to tax advisors who warned him that the section 861 argument does not work. Ignoring their advice, by October 2000, Snipes filed an affidavit stating the he did not understand the tax laws and whether or not they applied to him (another way of saying that section 861 means I don’t owe you squat!) As if this wasn’t bizarre enough, Snipes, who had stopped filing tax returns altogether, began sending the IRS, “Bills of Exchange,” signed with his name and social security number. It’s no surprise the IRS was not amused about receiving “monopoly money.”

IRS Response: “Hell to the Naw!” Section 861 does not allow U.S. citizens who work for U.S. companies to escape U.S. income taxes. Even if you somehow read it to say so, there are numerous courts cases that have dismissed this as frivolous and the IRS has made it very clear that this doesn’t work. Think about it. If this worked, why would anyone pay taxes? We would all create our own US companies and say goodbye to the taxman.

Although Mr. Snipes is far from being the only taxpayer to use the Section 861 argument, because of his celebrity status and the large amount of his tax liability, the IRS will probably make an example of him and finally get rid of this Section 861 nonsense altogether.

Prediction: Mr. Snipes will not see this all the way through in court. He will plead guilty, pay the back taxes and receive approximately 6 years, but serve 1 1/2 years.

2. The “Quiet” Tax Protestor

Protestor Profile: This type of protestor knows they aren’t paying taxes and refuses to do so by just not doing anything. There’s really no constitutional argument here and they don’t claim to be from outer space either. They simply just don’t pay because actions can speak louder than words.

Celebrity Example – Ron Isley: In Ron Isley’s case, he just didn’t pay for years; we’re talking almost three decades of dealing with tax woes. Back in 1997, Isley avoided jail time, but the IRS took his property (boats, cars, etc.). He filed for bankruptcy and that should’ve been the end of the story. However, by 2002, the IRS was knocking back on his door for some of the same issues; Isley failed to file tax returns from 1997 to 2001. Also, this time around there were allegations that he cashed his dead brother’s royalty checks. During the trial, Isley’s lawyer argued that his tax problems were due to several severe unforeseen circumstances such as the death of both of his accountants. The court was not persuaded.

IRS Response: “You Better Have My Money!” As with the “I’m Not Paying” Protestor, the IRS has no patience for the Quiet Protestor; especially when they are a celebrity flaunting their crib or ride on BET. The Judge in Isley’s case dubbed him as a “serial tax avoider;” which means he is such a repeat offender that they have no love for him – even given his age and medical condition.

Conviction: Sentenced to 3 years and 1 month and ordered to pay back $3.1 million in back taxes.

3. The “I Didn’t Know” Protestor

Protestor Profile: This type of protestor claims that they were ignorant of the tax laws and that’s why they didn’t pay.

Celebrity Example – Richard Hatch: Richard Hatch, the first winner of the TV show, Survivor, apparently filed a tax return, but somehow forgot to include his $1 million prize money as income on his tax return (along with $391,100 of income from co-hosting a radio show and rental properties). He argued that CBS should have withheld taxes from his winnings, since after all he was an “employee.” It was reported that Hatch was going to argue that CBS in fact agreed to pay these taxes, in return for him keeping his mouth shut about cheating on the show. But, this argument never made it in his testimony. What the jury did hear was that Hatch was a horrible bookkeeper and he didn’t mean to do anything wrong; basically, he didn’t know better.

It probably didn’t help that the accountant who prepared Hatch’s tax returns testified that he warned Hatch that he had to pay taxes on the prize money; a fact that was reportedly also supported in his Survivor contract with CBS. And, even more drama, Hatch was accused of using donations made to his charity to cover some $36,000 of his personal expenses.

Of course as with most protestor cases, there is a bizarre twist. Hatch was offered a deal, which required him to plead guilty, pay the back taxes and in return receive a light jail sentence. He said yes, and then changed his mind and walked away. Hindsight is 20/20.

IRS Response: “Wow, you really didn’t know that you had to pay taxes on $1 million? This really doesn’t pass our “smell test.” Pay us our money. The Judge in Hatch’s case found that Hatch’s testimony was “inherently incredible” and stated that he thought Hatch “lied.” It simply was not believable that he was ignorant of the law (and by the way, ignorance of the law is still not a defense. You still have to pay the taxes.). His defense could’ve helped with the jail time (if it were believable), but in this case it worked against him and probably resulted in a harsher sentence.

Conviction: Sentenced to 4 years and 3 months in prison, pay back $500,000 in taxes and psychological counseling.